The theme of 2021 – that of a global economy recovering from COVID-19, albeit at different paces – was upended toward the end of the year with the sudden advent of the omicron variant. And while hints of the variant’s potential mildness continue to emerge, a return to some degree of lockdown measures is all but assured now, at least for the first few months of 2022. These lockdowns couldn’t come at a worse time for cash-strapped governments, particularly those in the developing world, which are prevailing over ever-growing debt piles as the horizon for normalization gets pushed back further and further with each new variant of concern. Should omicron or any subsequent variant not prove sufficiently mild, then there’s a risk that 2022 could bring a debt crisis to the developing world or elsewhere.

Outlook

Years of COVID-related emergency stimulus and dovish central bank policy have left the global economy awash in debt (government, household, corporate, and bank), now approximately $300 trillion’s worth, which is roughly 3 times the world’s combined economic output. Accumulation has been most rapid among emerging economies, which together account for $92 trillion in debt, $3.5 trillion of which was tacked on in the second quarter of 2021 alone.

By way of comparison, global debt stood at just over $210 trillion as recently as 2016.

Debt in nearly all forms has spiked in the wake of COVID-19. For example, the US corporate sector took advantage of historical low rates and Federal Reserve quantitative easing to refinance preexisting debts and take on new ones. Notably, this leveraging trend actually predates the arrival of COVID-19, as US corporate debt was already hovering at a record high of 47% of GDP in 2019, before an additional $2.122 trillion in debt was added on in 2021 – an increase of 59% year-on-year.

According to S&P Global Ratings, some 500 companies will be looking to markets for refinancing next year alone. There are obvious risks lying in wait for many of them. First and foremost would be a COVID-related shock to short-term US growth prospects, which would drive up the cost of borrowing and threaten corporate revenue outlooks – a prospect that now seems assured with the only question being that of degree. Whether or not lockdowns are re-instituted in the United States during the New Year, pandemic-related alterations in consumer behavior can achieve the same effect, particularly in COVID-exposed industries such as services, tourism, and entertainment.